Bloomberg Article DL + AK M&A

[nycbusdriver]

If the "Tempe Tigers" don't change their stripes, the New AA will be fourth largest carrier within 5 years.  And that will happen even absent any other mergers in the industry.  

 

[FrugalFlyerv2.0]

I do not see any strategic way that DL could pull back its own flying in order to avoid DOJ objections to overlap between AS and DL without putting its longhaul international nonstops from SEA at risk. AS might decide to give up and become an exclusive partner for DL but DL isn’t likely to pull back its flights until it can determine that AS will really give DL the feed DL needs. DL’s moves right now, in my opinion, which others might agree with, is that DL’s actions are aimed to ensure that DL will have the feed it needs at prices that support DL’s international flights. I don’t believe that there is a scenario in which AS will all of a sudden stop decide to agree to a merger.

As DL continues to buildup SEA-Asia, what are the chances that hubs such as DTW could lose their Asia flights?  I realize that NW made DTW-Asia work quite nicely, but does it still work for DL or is it time to abandon that strategy?

 

[eolesen]

As long as the car companies remain headquartered in DTW, you'll probably see nonstops to Asia.

Thinking the unthinkable, if Ford or Chrysler decided that enough was enough as far as Michigan was concerned, and moved south or west, maybe there'd be some trouble.

There was a pretty well reported rumor over the summer that Tennessee was recruiting Fiat-Chrysler to relocate. With Detroit's bankruptcy and the sorry state the State is in, that might not be out of the question.

 

[WorldTraveler]

Actually, DTW-Asia other than to Japan was built by DL using 777s. NW and DL were both awarded PVG flights, NW from DTW and DL from ATL, right before the merger. DL operated ATL for a while but ultimately DTW won out. PEK and ICN were added after the merger along with HKG which has been dropped. While I fully believe NW had every intention of building DTW and MSP to Asia using the 787s, time ran out before the merger due to the 787 delays.

Even with SEA as a gateway, DL still needs an eastern US gateway to Asia and DTW fits the bill very nicely. There are rumors that DL will focus on JFK-Asia where NRT is DL's only flight as well as some additional LAX-Asia destinations but DL's focus is on SEA right now.

If DL does go ahead with an AS acquisition, and I am personally ambivalent whether they need to do based on what is publicly known, then it would clearly indicate they have much bigger west coast plans than what I have imagined. DL is overlapping a large part of AS' network and the "out" with the DOT is that the vast majority of the flights are in highly competitive markets.... AA and/or UA are in many of the markets and WN is seeing opportunities to grow in the PNW again.

The 333s are fairly large aircraft - nearly 300 seats in DL's config - that are capable of flying the Pacific which means they can either be used for SEA-Asia growth or replace 777s on other routes which would free the 777s up for new Asia growth - and the 777s work from other gateways including LAX. The 333's CASM is about as low as any aircraft is going to offer across the Pacific which means that DL's ability to develop new routes is strong.

As for the question of where new AA would end up in ranking, all of the big 3 will be very closely matched in size and network for the next several years short of a major restructuring. The primary driver in the ability to gain corporate business is filling in those parts of the network where each carrier is weak.

With or without AS, DL is moving aggressively in the west where UA is the largest network carrier but also has the highest CASM among the network carriers. They also happen to control a lot of gates which means they either have to maintain flights or risk losing gates. VX is also a disproportionately large gate holder in the west. They have primarily focused their strategies against AA and UA in their key markets but the calculus changes if they have to compete a lot more against AS, DL, and WN.

 

[Force Majeure]

Actually, DTW-Asia other than to Japan was built by DL using 777s.

In 2007, NWA had 31% market share of Asia, Delta had 2%.

http://library.corporate-ir.net/library/11/111/111021/items/231895/2_16_07NWABusinessPlanFeb07.pdf

DL built DTW-ASIA other than Japan? That must be a joke.

NWA served many Asian destinations through the NRT hub, but they also had non-stops from DTW. they served the following:

1992/1993 began Detroit Seoul = Taipei 744 = 72S

May 1, 1996 - Northwest Airlines, (NWA) begins scheduled non-stop service from DTW to Beijing , China 3x a week -- the First ever scheduled non-stop service between North America and Mainland China .

The U.S. Department of Transportation awards Northwest Airlines approval to restart daily, non-stop flights from Detroit to Shanghai in 2009.

I am sure you has some kind of qualifier to say that Delta was the leader in Asia back in the days from when they were in Monroe, LA.

 

[WorldTraveler]

DL built DTW-Asia outside of Japan AFTER the merger. DL obviously never flew DTW int'l except LGW before the merger a route it obtained from Pan Am and later sold to NW.

NW did not operate Seoul, Taipei, or Beijing from DTW at the time of the merger.

As I noted previously, PVG was awarded to both DL from ATL and NW from DTW. At the time of the merger, NW's only Asian flights were to Japan.

Specific to the question about how DTW-Asia would fit in with an expanded SEA operation, with or without AS, DL needs an internal US gateway because SEA is simply too far from too many markets in the eastern US.

a couple of industry analysts don't see an AS-DL merger as likely.
http://blogs.barrons.com/stockstowatchtoday/2013/12/23/delta-air-lines-and-alaska-air-merger-not-going-to-happen/?mod=yahoobarrons&ru=yahoo

 

[TDR1502C]

Is there a web resource for translating weasel speak?

 

[WorldTraveler]

Actually, DTW-Asia other than to Japan was built by DL using 777s. NW and DL were both awarded PVG flights, NW from DTW and DL from ATL, right before the merger. DL operated ATL for a while but ultimately DTW won out. PEK and ICN were added after the merger along with HKG which has been dropped. While I fully believe NW had every intention of building DTW and MSP to Asia using the 787s, time ran out before the merger due to the 787 delays.

 
PEK and ICN were added after the merger along with HKG which has been dropped.
 
any other routes to Asia which NW flew at the time of the merger which are not included in the post above?

 

[TDR1502C]

Why are you suddenly concerned with facts or history? Are you turning over a new leaf?

 

[WorldTraveler]

I'll presume that remark comes in a moment when you forgot the spirit of holiday cheer and isn't based on any actual facts.

Nowhere did I ever say that NW never flew DTW to any point in Asia outside of Japan before the merger just that post-merger DL developed DTW-Asia outside of Japan, none of which were flown at the time of the merger. NW's attempts at serving Asia outside of Japan were limited by the fact that the only aircraft they had for longhaul flights was the 747. The D10 and 330s helped develop some routes from both SEA and DTW but didn't have the legs for most of the routes NW needed.

As I have said multiple times before, it seemed pretty obvious that NW was counting mightily on the 787 to be able to diversify their own network away from Japan. It is thus in some ways a cruel irony that DL came along and used the 777s to develop DTW to the rest of Asia that NW once considered for their own fleet but did not buy in favor of the 330s. Now, DL is using the 330s that DL "got to know" because of NW to develop the west coast-Asia.

Life is funny like that, you know.

 

[TDR1502C]

You're right. My preferance for Palestinian Christian history and tradition over Santa stories got the better of me. Have a good one and don't worship money.

 

[topDawg]

I don’t suppose any of us who participate in this forum have any real internal information about what is going on between AS and DL which is why it is fun to speculate and debate. As such, no one’s perspective is any more or less possible.

My perspective is that:
1. There is nothing that DL has gained in information or benefits from AS that AS has not also gained from DL. There is no reason to doubt that the relationship is fully within the laws of the US that happen to be involving a small and a very large legacy carrier.

2. DL has made it clear by its actions that its original intent with the AS relationship was for them to provide much of the non-DL hub feed DL needed for its SEA international operation. DL’s apparent number one complaint with AS is that they have not provided that feed or has charged prices way in excess of what it would cost to provide that feed inhouse. DL has also expressed its displeasure with AS’ non-exclusive codeshare relationships, including with foreign carriers who directly compete with DL on many of the flights that DL operates from SEA.

3. DL is using large RJs for much of its new SEA domestic flying – but that is precisely what they do in most new markets. DL’s traffic reports show that DL is consistently shrinking the overall size of the DCI program while growing DL mainline so clearly DL’s deployment of large RJs at SEA is balanced out by upgrades from DCI to mainline elsewhere on the DL system. The scope restrictions on the number of large RJs (which I support) ensures that DL must upgrade other flights in order to free up large RJs for new routes. There are dozens of cities that have mainline service from ATL that haven’t seen it for decades because of DL’s upgrades.

4. DL doesn’t need to obtain enough gates to duplicate AS’ operation. They only need enough gates to fly to the largest feed markets because there is a contract which requires DL and AS to each provide a certain amount of feed to each other or face contractual penalties. DL has now put in place schedules to deliver the vast majority of its domestic feed traffic at SEA. The flows that are left to AS to deliver represent about five percent of the traffic.

Delta isn't even close to, not even close, to hitting all the markets it needs/wants to hit from SEA. Your on crack if you think places like DEN, PHX, ORD,BOS,MIA, IAD, DFW aren't needed to feed Asian traffic. Sorry, SJC,SAN,SFO,LAX aren't going to cut it. 

5. It is very possible that DL could upgrade a number of its large RJs from SEA to mainline aircraft down the road. Perhaps someone can say, but I doubt if DL is using any gates at SEA that can only handle large RJs but not mainline aircraft. Given that the large RJs are about half the size of an A320/M80, there is a lot of ability to add even more feed without adding a whole lot more flights.

The way SEA is set up, they wouldn't be able to reduce the number of flights. Its starts in the morning and ends at night. Unlike JFK its isn't banked. So they can add capacity to places they already fly, but not add more cities. 

6. There will be gates that will come available at both LAX and SEA. Other airlines can’t squat on gates or they will be lost back to the airport. The increased competition at both LAX and SEA will result in other airlines pulling back.

uhhh.....what? What lease are you reading? Delta, American, United can do whatever they would like with the gates they lease. 

7. AS is a very expensive airline for its size. And there really isn’t a whole lot that DL would gain that DL can’t build itself except for LAX-MEX, a restricted access route which is fully allocated and which neither AA nor DL can fly but UA and AS can on the US side. AM in which DL owns equity flies it but DL can’t realistically push connections onto AM because they are on the other side of the airport.

and the SEA slots, and a SEA hub overnight with tons of FFs, corp contracts, and aircraft in the two major markets they want to expand in (LAX/SEA) 
Oh and GATES.

I do not see any strategic way that DL could pull back its own flying in order to avoid DOJ objections to overlap between AS and DL without putting its longhaul international nonstops from SEA at risk. AS might decide to give up and become an exclusive partner for DL but DL isn’t likely to pull back its flights until it can determine that AS will really give DL the feed DL needs. DL’s moves right now, in my opinion, which others might agree with, is that DL’s actions are aimed to ensure that DL will have the feed it needs at prices that support DL’s international flights. I don’t believe that there is a scenario in which AS will all of a sudden stop decide to agree to a merger.

short term pain for long term gain. Delta could get an agreement to talk for AS and pull back its unprofitable flying. Then go to the government and say SEA is to small for a hub like Delta wants with AS there. Toss them some gates/slots and make a few promises and bam. Done deal. The DOJ has yet to really stop a merger..... UA/US is as close as they got, but even then, UA/US were working out a deal to get the green light, they just took to long. 

I’m not many people at other AS or DL really want to get into a merger unless it is a cordial and agreed to be in the best interests of both airlines. Right now, that seems to be a very distant reality.

money is all it would take. As we saw with Delta, If they don't have a CEO that wants to merge, the BOD will be happy to find one. Money always talks. Its just simply a question of how much does it take and will Delta be willing to put the money on the table for it. 

 

[eolesen]

Dawg, money doesn't always talk, and it has nothing to do with the CEO wanting to merge or not.

From all indications so far, the BOD has no interest in merging. And if the board isn't interested, it ain't happening.

 

[WorldTraveler]

Dawg,
I completely understand that ALK is a publicly traded company and thus the company and BOD does have to entertain any offer to buy the company that provides value above the current level of the company.  If DL is serious about trying to make an offer for ALK, then their strategy appears to be to, first, pull a lot of the $200M in connecting revenue that AS provides DL off of AS and put it on DL or DCI and, 2nd, provide competition on many of AS' key routes.  Given that many of DL's new routes don't start for 6 months, the impact will take time to show up on AS' finances.  I am very aware that DL could propose a value that is superior to what ALK thinks they can generate internally using their own internal growth models which will be pressured as AS faces increased competition on many of their top routes. 
 
Even if there is no other motives, AS' network is prime for increased competition because of the relatively high RASM that AS gets compared to other west coast operations, even considering ALK's low costs - which are driven down in large part because of their high-growth model.
 
That said, DL DOES NOT need to replicate AS' SEA hub in order to make DL's Pacific network work.  AS mgmt. has already acknowledged that there is a long-term contract between AS and DL which has minimum performance clauses as well as breakup penalties.  DL has also told AS that it will not codeshare on duplicate routes which DL and AS both serve and DL will not add any more codeshares which means that AS' new flights into DL hubs have to exist solely on what AS can carry in traffic out of those hubs connecting at SEA or PDX.  Also, because of the minimum performance requirements and DL providing its own feed on the largest markets to/from SEA, DL is essentially forcing AS to provide feed in the smaller markets from SEA, ensuring that AS either provides that feed or pay DL a penalty.
 
I didn't say anything about DL reducing its operation in SEA unless a merger occurs.  If anything, DL can start putting mainline aircraft on flights that have been added with CR9s and E175s.  DL could double its seats from SEA if it converts large RJs to 320/M80/90/738 flights on average.  The 717 is a natural step up in capacity while the 739s and a few int'l reposition flights could add tons of seats. 
 
Long term, of course, DL needs more feed than the 12 cities it will serve between its hubs and large western cities and DL does want and need that feed long-term.  But DL does have enough feed in the near term with DL's own/DCI service plus the AS codeshare.
 
DL likely does have many of the corporate contracts or is able to get them because AS can't win corporate travel for int'l flights and DL will always have the advantage in SEA in offering a global network compared to AS.  Even if AS joined with its partners, it would have to offer multiple contracts to serve the world because DL is the only SEA airline that can serve multiple cities in Asia, Europe, and the US - and DL has picked off the largest markets.   
 
DL has to prioritize its expansion to focus on the most heavily traveled routes which also are routes that are most competitive and where the least DOJ concern would arise because of AS/DL overlap should a merger occur. 
 
Several cities that DL has not served from SEA are other airline (OA) hubs such as PHX and DEN.  DL is not wanting to expand this war into OA hubs any more than is necessary (SFO had to happen).  Further, UA likely would retain the majority of the Pacific traffic on its own network regardless of what other carriers try to do.  New AA has its own marketing power in PHX.   
 
There is also the strategic consideration that by buying AS, DL would cut off feed to other carriers including many of DL's foreign competitors and AA.  DL can't stop that by just adding its own service. 
 
And every major airport has minimum gate use requirements for every airline.  If UA or VX or any other airline that gets caught in the middle of this reduces their service, the airports involved can repossess the gates.  Part of DL's strategy  is to put as much pressure on other carriers including UA with its industry-highest CASM in order for UA to be forced to either fly routes which they lose more and more money on or reduce their schedule to the point where gates become available for other carriers.  Either way, if this battle continues other airlines will be hurt and the chances are high that they will reduce their schedules which will either provide an opportunity for DL to obtain gates or it will reduce those other carriers' overall strength in the western US which will help DL relative to those carriers. 
 
It is also very likely that DL is talking with SEA about additional gates that DL could build.  DL just spent over $1B on a new facility at JFK and they will do the same at SEA knowing their long-term presence on the Pacific demands it. 
 
This whole process will take a long time to play out unless the BOD at ALK recognizes that their business will be damaged and they agree to a merger. 
 
For the foreseeable future, AS and DL are apparently prepared for a long drawn out process before anyone is forced to make any decisions. 

 

[topDawg]

Dawg, money doesn't always talk, and it has nothing to do with the CEO wanting to merge or not.

From all indications so far, the BOD has no interest in merging. And if the board isn't interested, it ain't happening.

No one has made a real offer. No BOD/CEO, wants to merge.....But even like what happened with AA, once enough pressure is added then the options will be looked at. I'm not saying it will happen, but it could. 
 

Dawg,
I completely understand that ALK is a publicly traded company and thus the company and BOD does have to entertain any offer to buy the company that provides value above the current level of the company.  If DL is serious about trying to make an offer for ALK, then their strategy appears to be to, first, pull a lot of the $200M in connecting revenue that AS provides DL off of AS and put it on DL or DCI and, 2nd, provide competition on many of AS' key routes.  Given that many of DL's new routes don't start for 6 months, the impact will take time to show up on AS' finances.  I am very aware that DL could propose a value that is superior to what ALK thinks they can generate internally using their own internal growth models which will be pressured as AS faces increased competition on many of their top routes. 
 
Even if there is no other motives, AS' network is prime for increased competition because of the relatively high RASM that AS gets compared to other west coast operations, even considering ALK's low costs - which are driven down in large part because of their high-growth model.
 
That said, DL DOES NOT need to replicate AS' SEA hub in order to make DL's Pacific network work.  AS mgmt. has already acknowledged that there is a long-term contract between AS and DL which has minimum performance clauses as well as breakup penalties.  DL has also told AS that it will not codeshare on duplicate routes which DL and AS both serve and DL will not add any more codeshares which means that AS' new flights into DL hubs have to exist solely on what AS can carry in traffic out of those hubs connecting at SEA or PDX.  Also, because of the minimum performance requirements and DL providing its own feed on the largest markets to/from SEA, DL is essentially forcing AS to provide feed in the smaller markets from SEA, ensuring that AS either provides that feed or pay DL a penalty.

You would be pretty surprised to see just what Delta is planning, or at least wants to do. Like they have done in LA they have to hit the big markets.  

I didn't say anything about DL reducing its operation in SEA unless a merger occurs.  If anything, DL can start putting mainline aircraft on flights that have been added with CR9s and E175s.  DL could double its seats from SEA if it converts large RJs to 320/M80/90/738 flights on average.  The 717 is a natural step up in capacity while the 739s and a few int'l reposition flights could add tons of seats.

717s aren't going west. Zero plans for it. ATL/DTW and NYC will be where they fly. (with some MSP flying with crews from the above bases) Good that they can add seats, I understand that. What I am telling you is Seats in SEA-SFO isn't a problem for Delta. Lack of flying to PHX/DEN/BOS/IAD/MCO/IAH/DFW/ORD/MIA etc is a problem. No amount of capacity on the current routes will fix the network issues in SEA. 

Long term, of course, DL needs more feed than the 12 cities it will serve between its hubs and large western cities and DL does want and need that feed long-term.  But DL does have enough feed in the near term with DL's own/DCI service plus the AS codeshare.

which is why they keep growing right? Today they have 12, tomorrow they could very well load 2 more. then 2 more. then 2 more. 
Delta isn't happy with what they have in SEA, short or long term. United is simply kicking their ass outside of PVG, from the mainland. Your the only one who seem to disagree. 

DL likely does have many of the corporate contracts or is able to get them because AS can't win corporate travel for int'l flights and DL will always have the advantage in SEA in offering a global network compared to AS.  Even if AS joined with its partners, it would have to offer multiple contracts to serve the world because DL is the only SEA airline that can serve multiple cities in Asia, Europe, and the US - and DL has picked off the largest markets.

 
Delta has a nice hold on the SEA local contracts, but who do you think has contracts from companies in say, PHX? Delta with 2-3 stops or Untied with one stop flying? 
Also, Delta could do a lot better in SEA if they hit the top-10/15 markets along with the international flying. Thats pretty much the goal. 

DL has to prioritize its expansion to focus on the most heavily traveled routes which also are routes that are most competitive and where the least DOJ concern would arise because of AS/DL overlap should a merger occur.

 
wait what? Okay, Delta/AS don't have that much overlap. Get that out of your head. It is very comparable to other airline mergers. 

Several cities that DL has not served from SEA are other airline (OA) hubs such as PHX and DEN.  DL is not wanting to expand this war into OA hubs any more than is necessary (SFO had to happen).  Further, UA likely would retain the majority of the Pacific traffic on its own network regardless of what other carriers try to do.  New AA has its own marketing power in PHX.

 
No telling what would happen if Delta added those routes. One can look to LAX to see that, even if you will burn money, some routes are needed. Delta is adding Dallas and Boston from LA for this reason. SEA is simply LAX 4 years ago.  

There is also the strategic consideration that by buying AS, DL would cut off feed to other carriers including many of DL's foreign competitors and AA.  DL can't stop that by just adding its own service. 
 
And every major airport has minimum gate use requirements for every airline.  If UA or VX or any other airline that gets caught in the middle of this reduces their service, the airports involved can repossess the gates.  Part of DL's strategy  is to put as much pressure on other carriers including UA with its industry-highest CASM in order for UA to be forced to either fly routes which they lose more and more money on or reduce their schedule to the point where gates become available for other carriers.  Either way, if this battle continues other airlines will be hurt and the chances are high that they will reduce their schedules which will either provide an opportunity for DL to obtain gates or it will reduce those other carriers' overall strength in the western US which will help DL relative to those carriers.

it is a very, very, very low number. Not one that will be reached in LA or SEA. You need to chill out on that CASM stuff, United is still a much bigger dog in LA, even with the fact that the bulk of the hub is OO flying, than Delta. Corporate accounts could careless about your meaningless stats. United and American are the big airlines in LA. CASM or not, both airlines will be happy to burn money to keep the corp. accounts they have. 
and VX? what does Virgin have to do with anything?
Delta has two options in LA, get space from United, unlikely, or American....no way in hell. What Virgin, Southwest, jetBlue or any of the other northside airlines do have nothing to do with Delta.  

It is also very likely that DL is talking with SEA about additional gates that DL could build.  DL just spent over $1B on a new facility at JFK and they will do the same at SEA knowing their long-term presence on the Pacific demands it.

Where? this your problem, you just pull crap out of your ass. Delta can talk to the POS and LAWA all they want....fact is they are basically crap out of luck. 
 
This isn't JFK. JFK has space for terminals. SEA/LAX doesn't. (at least that will be used by Delta)